Budgets are tight – for employers and employees alike. That’s why it’s important to understand your 401(k) costs and evaluate exactly whether your plan is too expensive, both for employers on a tight company budget, and for employees, who are paying fees out of their retirement savings.
Expensive 401(k) investment fees for employees
“The typical American worker, earning a median salary starting at age 25, will pay an estimated $138,336 in 401(k) fees over their lifetime,” according to an article published by Motley Fool. “The typical 401(k) plan charges 1% of assets managed.”
Complex fee structures can make it difficult to identify specific costs, but as described by the Department of Labor (DOL), plan fees are broken into four categories:
Asset-based: expenses based on the amount of assets in the plan (usually .31% – 1.88%), also sometimes referred/inclusive of “fund fees” or “expense ratio”.
Per-person: fees based on the number of eligible employees, or the number of participants in the plan
Transaction-based: expenses based on completing a particular plan service or transaction
Flat rate: fixed charge that doesn’t vary, regardless of plan size
Fees matter to employers, but they really matter for employees. Even a 1.0% increase in fees can have a significant impact on an employee’s retirement investment balance.
When considering the fees for a 401(k) plan, look at the expense ratio which a plan charges their shareholders. The expense ratio is an annual calculation that divides a fund’s operating expenses by the average dollar value of the assets under management.
It’s important for employees to find all the fees and calculate the plan’s expense ratio. According to the 401k Averages Book, this ratio should fall somewhere between 0.31% (low) and 1.88% (high). This summary of data from the book provides a good idea of typical fees that might be included in a plan—based on participants and asset size.
Human Interest is an example of a provider that’s keeping fees affordable. Employee participants in plans managed by Human Interest pay a fee that is 0.50% of the account balance and covers fiduciary, custodial, and advisory fees. Fund fees for a typical portfolio average an additional 0.07%.
If you’re wondering how your plan compares:
“At year-end 2014, 88% of 401(k) plan equity fund assets were invested in mutual funds with expense ratios of less than 1%,” according to an article in Forbes, while only “1% of assets were invested in funds with expense ratios of 1.5% or greater.”
Expensive 401(k) administration fees for companies
Because 401(k) providers keep their costs opaque, and offer discounts and varied pricing depending on the client, understanding fees requires some digging to get a clear picture. Based on information from traditional providers as well as newer providers focused on small to medium-sized business, typical 401(k) employer fees for companies with ten employees include:
Employer Annual Fee ($1,000 – $3,500)
Monthly Base Fee ($100 – $300)
Monthly Per Employee (depends on employee count)
Broker Fees ($0 – $5,000)
Setup Fee ($500 – $1,000)
The first step for employers is to request quotes from a variety of 401(k) providers. Look at what the initial year’s fees will be, and remove the setup fee to determine your ongoing annual costs. Once you select a provider, don’t assume things are set in stone. Be sure you’re tracking the costs for these fees each year. If you see a significant increase, you’ll want to discuss and negotiate with your provider.
Hall of shame: Breach of Fiduciary Duty for excessive fees
Fiduciary duty requires that companies and brokers do not put their interests over their clients’ interests (more detail on this concept here: What is a 401(k) Fiduciary and Why Does It Matter?). What this means, practically, is that you cannot encourage or require people to put their money in funds that charge excessive fees just because you will make a commission on that deal.
This has been a big issue in the news recently, and here are some of the articles that describe the lawsuits that are being filed for breach of fiduciary duty and exorbitantly high fees.
MIT, Yale and NYU sued over charging excessive 401(k) and 403(b) fees
“In the case of MIT, a 401(k) plan based in Cambridge, Mass., the complaint alleges MIT’s close relationship with Fidelity Investments led to Fidelity’s selection as plan record keeper, without any competitive bidding process in violation of the university’s duty to act in the exclusive interest of its employees and retirees….it also alleges MIT placed more than 150 Fidelity funds, including high-priced retail funds, in the $3.5 billion plan, despite being a big enough plan to be able to command lower fees. This has allegedly caused participants to pay unreasonable administrative and investment management expenses.“
New 401(k) Excessive Fee Suit Filed Against Delta Air Lines
“Examples given in the complaint include: Defendants selected the fund Janus Forty S, with an expense ratio of 1.00, as an investment option, when the equivalent fund Janus Forty I, with an expense ratio of .60, was available; Janus Research T, with an expense ratio of .95, when Janus Research I, with an expense ratio of .78 was available; and PIMCO Low Duration ADM, with an expense ratio of .71, when PIMCO Low Duration D, with an expense ratio of .56 was available.”
The three below are significant because these companies are 401(k) providers themselves, and provide 401(k) services for other companies, and yet even their own employees sued them for excessive fees.
MassMutual settles 401(k) suit with its employees for $31 million
Morgan Stanley accused in lawsuit of mismanaging its 401(k) retirement savings plan
Transamerica settles 401(k) excessive-fee lawsuit with its employees for $3.8 million
The bottom line: it’s important to find a provider that offers reasonable fees for employers and employees, and to continue to monitor those fees. The fees for small business 401(k) plans can vary quite a bit and the consequences for an over-priced 401(k) plan are huge—participants must work longer to meet their retirement savings goals and fiduciaries face liability for plans that have unreasonably high fees.
Article ByThe Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.